Introduction to Forensic Accounting

By Grippo, Frank J.; Ibex, J. W. "Ted" | The National Public Accountant, June 2003 | Go to article overview

Introduction to Forensic Accounting


Grippo, Frank J., Ibex, J. W. "Ted", The National Public Accountant


Forensic accounting is a science (i.e., a department of systemized knowledge) that deals with the application of accounting facts gathered through auditing methods and procedures to legal problems usually dealing with financial and valuation issues. It is very different from traditional auditing. Forensic accounting is the investigation of an allegation; the evidence is expected to be presented in a judicial forum. Forensic accountants often employ specialists in other areas as part of a team to gather evidence. There must be absolute assurance before evidence is presented in court.

The scope of the investigation may be limited to specific issues. The financial wherewithal of the client is a key factor in determining the depth of a forensic investigation. Forensic services may be very costly. It is important for the client to understand, from the onset, the costs to finance the litigation. There should be a cost/benefit relationship. There are a few principled people who will want to spend a dollar to recover 50 cents, but they are not the norm.

Forensic accounting integrates investigative, accounting and auditing skills. Forensic accountants look at documents in a critical manner in order to draw conclusions and to calculate values. They review financial and other data to identify irregular patterns and/or suspicious transactions--always with an awareness of areas ripe for fraud. Forensic accountants don't merely look at the numbers--they look behind the numbers.

The marked increases in white-collar crime and business disputes and other claims have helped created the need for forensic accounting. It is used in a variety of situations including but not limited to, the following

* Business valuations

* Divorce proceedings and matrimonial disputes

* Personal injury and fatal accident claims

* Professional negligence

* Insurance claims evaluations

* Arbitration

* Partnership and corporation disputes

* Shareholder disputes (minority shareholders claiming oppression)

* Civil and criminal actions concerning fraud and financial irregularities

* Fraud and white-collar crime investigations.

AREAS OF FORENSIC ACCOUNTING

Forensic accounting can be divided into two areas of specialization--litigation support and investigation or fraud accounting. Litigation support specialists concern themselves with business valuation, economic damages, testimony as expert witnesses future earnings evaluation and income and expense analysis Fraud accountants apply their skills to investigate areas of alleged criminal misconduct in order to support or dispel damages. Because these fields overlap, a forensic accountant may do litigation support work one month and perhaps act as a fraud accountant on another engagement the following month. More likely, the forensic accountant will be working on several types of engagements simultaneously.

Litigation Support

This is a situation where the forensic accountant is asked to give an opinion on either facts that are known or those that have yet to be uncovered. The forensic accountant is an integral part of the legal team. In this capacity, he/she helps to substantiate allegations, analyze facts, dispute claims, and develop motives. The amount of involvement and point at which the forensic accountant gets involved varies from case to case. Sometimes the forensic accountant is called upon from the beginning of the case; at other times the forensic accountant is only retained before the case is scheduled to go to court and after out-of-court settlements have failed.

In litigation support, the forensic accountant assists in obtaining documentation to support or dispel a claim. He/she may be called upon to review documentation in order to give an assessment of the case to the legal team and/or identify areas where a loss occurred. Moreover, the forensic accountant may be asked to get involved during the discovery stage to help formulate questions. …

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